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Pharma-pricing

Bringing Clarity to Pharma Pricing

February 25, 2020

By: Jesse Mendelsohn, Vice President | Model N

As the election season heats up in the U.S., the debate surrounding healthcare and pharmaceutical prices continues. Changes to the safe harbor rule have been tabled, but the demand for value, pricing transparency, and affordability lives on. Governments at all levels, consumer advocacy organizations, and consumers want to understand how drugs are priced and why those prices can be so drastically different from one region to the next.

To better understand where we’re headed, we need to remember what brought us here. What determines the price paid by patients, payers, and the government is a complicated formula that involves the manufacturers’ set price, availability of branded and generic products, and rules and negotiations set by public and private insurance programs.

Manufacturers are free to set the price of their drugs and consider a number of factors when doing so: business expenses (R&D, marketing, etc.), competition, patent status, anticipated volume, and estimated income.

Generic drugs create stiff competition. Brand-name drugs are typically under patent protection for 20 years from the date of submission. Once protection runs out, generic versions of that drug can go market after thorough manufacturer testing and FDA approval. Considering that many insurance companies incentivize patients through lower copays to use generic drugs, availability plays an important role in the pricing equation.

But things really get complicated when you add public and private insurance programs to the mix. Through pharmacy benefit managers (PBMs), insurance companies and employers negotiate upfront discounts and rebates, which ultimately, help insurers develop their formularies, set co-pays, and determine final costs for patients. 

Furthermore, the consolidation of commercial insurers and healthcare providers has boosted their negotiating power, influenced how medicines are used and prescribed, and ultimately, impacted the final cost to an even greater extent.

On the manufacturing side, R&D pipelines are expanding, and success rates have hit historic levels. Development costs associated with specialty, niche, and orphan drugs have introduced new levels of complexity into the pricing environment. Driven by the growing competition across the globe, manufacturers are seeking ways to maximize revenue on their brand-name products before patent protection runs out. This in part has led to some price increases that have been deemed excessive by consumers and policymakers – which has generated greater scrutiny and public distrust.

With this perfect storm in place, most industry thought leaders expect new regulatory rules and mandates to come soon – though these likely won’t happen this year due to the elections. In preparation for what is likely coming, pharmaceutical manufacturers should put the processes in place today that can help them optimize their operating models, continuously improve their margins, and increase visibility into pricing.

The Guide to Revenue Execution for Pharmaceutical Manufacturers details how companies can effectively adhere to current regulations, while maintaining public trust and credibility. Along with helping companies evaluate their current state in response to the changing landscape, the guide addresses the key strategy of automating revenue execution to:

  • Roll out global pricing that enables sales teams to increase market share and maximize profit
  • Ensure every customer is correctly charged
  • Improve the accuracy of rebates and chargebacks

Through solutions like Model N Revenue Cloud for Pharma, we continue to build in agility and cloud-based functionality to help our customers prepare for future regulatory initiatives, capitalize on the digital transformation, and leverage analytics and automation to boost efficiencies and better manage revenue. We look forward to working with our customers to maximize every revenue moment as they navigate the complex road ahead. For more information, please visit www.modeln.com/pharma-vision2020.

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